Breakeven Rate

The breakeven rate (or breakeven yield change) is the amount by which yields can rise before a long bond position turns unprofitable. It combines the two sources of positive return that cushion against rising yields: carry and roll-down.

Breakeven = (Carry + Roll-down) / Duration

For example, if a 10-year Treasury has +50 bps of annualized carry and roll-down combined, and a modified duration of 8 years, the breakeven yield rise is approximately 50 / 8 = 6.25 bps per year. If 10-year yields rise by less than 6.25 bps over the next year, the position is profitable; if they rise by more, the capital loss exceeds the income.

Breakeven analysis is central to:

• Trade evaluation: comparing the breakeven to your rate view determines whether a long position makes sense
• Relative value: comparing breakeven rates across maturities identifies which sectors offer the best cushion
• Risk management: knowing the breakeven tells you the "margin of error" in your rate forecast

The Salomon Brothers yield curve primer (Part 6) formalizes breakeven analysis as the core framework for evaluating curve trades. The blog post "Forward Rates as Market Forecasts" shows that the breakeven rate is closely related to the implied forward rate — if rates follow the path implied by forwards, the investor earns exactly the short-term rate.

In a steep curve environment, breakeven rates are wide, providing substantial cushion. In a flat or inverted curve, breakeven rates are thin or negative, making long positions vulnerable.